PRESSURE
Slower deposit growth is putting modest upward pressure on interbank money market rates; the three-month rate has edged up since August to 1.50 percent.

But the conditions for a sharp rebound of rates are not in place. Annual growth in loans and advances by banks in the UAE, net of provisions, rose to 3.5 percent in September from 2.2 percent in August, but lending activity still appears well below levels at which it could strain liquidity.

In a report last week, Moody’s Investors Service predicted bank lending growth in the UAE would remain subdued over the rest of 2011 at around 3-5 per cent, compared with 25 per cent in pre-crisis times, and lending would stay cautious into 2012.

The real estate market remains weak, with analysts seeing room for more price declines, and turnover in the UAE’s stock markets is running at half or less of its levels two years ago. Meanwhile, the euro zone debt crisis and turmoil in global financial markets is clouding the outlook for asset prices across the world.

So for now, a big outflow of UAE deposits into asset markets looks unlikely. And if the euro zone crisis worsens further, to the point that investors start pulling money out of major banks in the West, UAE bank deposits could once again act as a safe haven, given the high capital levels of UAE banks and the potential backing of cash-rich Abu Dhabi in an emergency.

Moody’s noted that UAE banks had been increasing their capital over the past two years and that their average Tier 1 capital at end-2010 was 14.3 percent of assets — very high by global standards and well above the 6 percent specified by the Basel III banking standards. (By Martina Fuchs ; Editing by Andrew Torchia)